The Hindu Business Line : Negative outlook on Tata Engg

Equity options: Calls on Tata Engg ended lower, with the July 160 calls clocking the highest volumes on the stock. The immediate outlook on Tata Engg appears negative. You can consider buying puts than selling calls, because the stock's volatility (vols) has increased in the last few days; increase in stock vols is good for long calls and puts, and works against short positions. Consider buying the July 155 puts. Your long puts will not lose heavily due to passage of time, as the option's theta is low. Note, however, that the option's delta is also low. This means that the put value will rise slowly for every point decline in the stock price. Incidentally, the open interest in the July 160 puts increased sharply on Tuesday, which suggests that the traders are taking a negative view on the stock. You have to buy a minimum of 3,300 puts to create the long position.

The immediate outlook on ACC appears negative. Consider buying the July 160 puts. You will benefit from the option's low implied vols. This means that the puts will rise in value if the traders re-price the options based on higher vols, and this may happen even if the stock price moves up. Your long put position will not lose heavily due to passage of time, as the option's theta is low. Incidentally, based on the closing prices, you can theoretically make money by buying the July 160 calls and selling the 160 puts. But given the negative outlook on the stock, such a position will lose money because, typically, calls fall in value, while puts rise in value when the stock moves down.

Index options: The Nifty calls ended lower, even though the spot index remained range-bound. The outlook on the market still appears uncertain. You can buy the July 1090 calls and the July 1060 puts. The advantage of such a position is that you can benefit from the calls if the market moves up, while the maximum loss you will incur on your puts is the premium paid. Similarly, your puts will fetch you money if the market moves down, while calls will incur losses. This position will make money if the spot index moves sharply in either direction before the expiry of the July contracts. The combination (called Strangle) carries high vega. This means that the Strangle's value will increase sharply for every point increase in the options' implied vols.

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